MF Global Holdings Ltd. had its credit ratings cut to the lowest investment grade by Moody’s Investors Service after the broker run by former New Jersey governor Jon Corzine failed to reach earnings targets and on concern risk management isn’t sufficient.
Moody’s lowered MF Global’s long-term ranking to Baa3 from Baa2 and left the New York-based company on review for a further downgrade, the ratings firm said today in a statement. The “current low interest environment and volatile capital market conditions” make it unlikely MF Global can achieve financial targets of $200 million to $300 million in annual pretax earnings, Moody’s said.
Corzine, who helped run Goldman Sachs Group Inc. from 1994 to 1999, is attempting to transform MF Global into a medium- sized investment bank and has sought to increase trading with the firm’s money and facilitate transactions for clients. Moody’s highlighted added exposure through repurchase transactions to the debt of European governments that have been among the hardest hit by the region’s sovereign debt crisis.
“MF Global’s increased exposure to European sovereign debt in peripheral countries and its need to inject capital into its broker-dealer subsidiary to rectify a regulatory capital shortfall highlights the firm’s increased risk appetite and raises questions about the firm’s risk governance,” Al Bush, a senior analyst at Moody’s, said in the statement announcing the downgrade.
European Debt Exposure
MF Global said last month that it increased net capital at its U.S. unit after the Financial Industry Regulatory Authority raised concern about the European debt portfolio.
As of June 30, MF Global had exposure to about $6.4 billion of securities, net of hedging, to Italy, Spain, Belgium, Portugal and Ireland with a weighted average maturity of October 2012, according to a regulatory filing in August.
The portfolio is “sound and well structured,” MF Global said today in a statement. All of the European government securities mature by December 2012 before the expiration of the region’s rescue fund, the European Financial Stability Facility, the company said.
“We are confident that we have the resources, capital, liquidity and expertise to successfully manage our European exposures to their end date maturity of December 2012,” Diana DeSocio, a spokeswoman for MF Global, said in the e-mailed statement. “The maturity characteristics, ratings profile and European support facility for lower rated credits reinforce our view that that the portfolio is sound and well-structured.”
MF Global fell 1.9 percent to $3.61 as of 1:50 p.m. New York time, the lowest since February 2009. The shares earlier had climbed to as high as $3.77.
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